Morrison Foerster’s Government Contracts Insights provides our in-depth analysis of developments and trends impacting government contracting. Through Insights, our attorneys offer a real-time assessment of the statutory, regulatory, legal, and business-related developments and trends that are shaping the industry. We also examine a full array of non-U.S. public procurement issues, mindful that our clients compete in a global marketplace.Morrison Foerster’s nationally recognized Government Contracts and Public Procurement practice represents the world’s leading companies in the aerospace and defense, intelligence, cybersecurity, information technology, financial and professional services, education, healthcare, infrastructure, and logistics support sectors. We are enlisted to address our clients’ most complex and important legal issues. Our work includes contract and subcontract negotiation and other transactional matters, business and regulatory compliance counseling, internal investigations, bid protests, and a wide array of enforcement and litigation matters. Our clients range from Fortune 50 companies to small and medium-sized companies just entering the public sector. We advise both U.S. and non-U.S. companies involved in municipal, state, federal, and non-U.S. procurement matters.<h2>ABOUT MORRISON FOERSTER</h2>Morrison Foerster is a leading global law firm that transforms complexity into advantage for its clients. Our clients include some of the largest financial institutions, banks, consulting and accounting firms, and Fortune 100, technology, and life sciences companies. Highlighting the firm’s commitment to client service, leadership in market-changing deals and impact litigation, and values-based culture, Morrison Foerster has been repeatedly recognized as one of the top 10 firms on The American Lawyer’s A-List. Year after year, the firm receives significant recognition from Chambers and The Legal 500 across their various guides, including Global, USA, Asia‑Pacific, Europe, UK, Latin America, and FinTech Legal. Our lawyers passionately care about delivering legal excellence while living our values. Morrison Foerster has a long-standing commitment to creating a culture that respects and celebrates differences, while providing an inclusive environment. The firm has achieved Mansfield Certification Plus since 2018 as a result of successfully reaching at least 30 percent women, communities of color, and LGBTQ+ lawyer representation in a notable number of current leadership roles and committees. The firm also has a long history of commitment to the community and society through providing pro bono legal services, including litigating for civil rights and civil liberties, improving public education and fostering the wellbeing of children, advocating for veterans, promoting international human rights, enforcing the right to asylum, and safeguarding the environment.

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Tina is Co-chair of Morrison Foerster’s Government Contracts & Public Procurement practice. She represents a wide variety of government contractors including information technology, defense, biotechnology, and pharmaceutical companies, with a focus on general contract counseling and compliance, particularly concerning intellectual property, and cybersecurity matters and federal grant funding.Tina counsels contractors on compliance with federal, state and local acquisition and ethics regulations and with the evolving myriad of requirements pertaining to data security and cybersecurity. She has been involved with numerous internal investigations and compliance reviews, and with mandatory and voluntary disclosures to agencies, and litigation of False Claims Act matters.Tina routinely advises clients concerning:<ul><li>Prime-subcontractor relationships</li><li>Sources of supply and country of origin requirements</li><li>Price reductions and price reporting issues</li><li>Organizational conflicts of interest</li><li>Safeguarding of intellectual property and other proprietary interests</li><li>Licensing and data rights issues</li><li>Handling of classified materials and controlled unclassified information</li><li>Agency suspension and debarment proceedings</li></ul>She also assists clients with due diligence and other activities related to the acquisition of government contracting concerns, and with the drafting and negotiation of teaming agreements, subcontracts, licensing agreements, and cooperative research and development agreements. She also assists clients applying for federal grants (including SBIR and STTR agreements), and those who seek to obtain other transactional authority agreements, as well as those competing for state and local government work.Tina’s litigation experience includes government contracts claims litigation in federal courts and before boards of contract appeals, bid protests before the Government Accountability Office and the Court of Federal Claims, and complex disputes in federal courts, including civil fraud and False Claims Act litigation and reverse Freedom of Information Act litigation.Prior to joining Morrison Foerster, Tina worked at another large national firm and as a trial attorney in the Office of the General Counsel of the Navy, Navy Litigation Office.<h4>Representative Experience</h4><ul><li>Negotiation of largest CHIPS Act federal funding agreement between multinational semiconductor corporation and U.S. Department of Commerce.</li><li>Negotiated prime contract and major subcontracts related to the Department of Energy’s next generation supercomputer program, including extensive IP rights negotiations and negotiation of associated patent rights waivers.</li><li>Negotiated series of other transaction authority agreements with DARPA and associated subcontracts with more than a dozen research universities on behalf of a firm biotech client, including complex IP rights allocations and material transfer agreements.</li><li>Assist clients with FedRAMP authorization process and with development of license agreements for software products sold to federal, state and local government agencies.</li><li>Cyber incident response counseling to some of the largest companies and organizations impacted by security incidents.</li><li>Advises clients on Bayh-Dole reporting of inventions and IP strategies for contracts and grants.</li><li>Conducts due diligence for major government contract mergers and acquisitions.</li></ul>

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Tina is co-chair of Morrison Foerster’s Government Contracts & Public Procurement practice. She counsels a wide variety of government contractors on compliance with federal acquisition and ethics regulations. She drafts and negotiates contracts on their behalf and has been involved with numerous internal investigations and compliance reviews, and with bid protest, contract claims, and False Claims Act litigation. She also advises on M&A transactions involving government contractors.

Tina D. Reynolds

Jim Tucker is of counsel in Morrison Foerster’s Government Contracts and Public Procurement Practice Group and is based in the firm’s Washington, D.C. office.Jim’s practice runs the gamut of litigation and counseling in federal procurement matters, with an emphasis on bid protests, Cost Accounting Standards disputes, and small business matters. He has represented both protesters and awardees in scores of protests before the Government Accountability Office, the Court of Federal Claims, and procuring agencies, in acquisitions ranging from small business procurements to multibillion-dollar contracts of global significance. His representative protest matters span the aerospace sector, the Intelligence Community, base operations and logistics, healthcare, nuclear and environmental work, and information technology and software acquisitions. His protests have included both classified and unclassified programs. In addition to prevailing in published decisions, Jim has also secured favorable corrective action on behalf of clients in a wide variety of protests that were resolved without a published decision.Jim’s work also focuses on disputes over cost allowability and compliance with the Cost Accounting Standards, and he has appeared before the Armed Services and Civilian Boards of Contract Appeals, in size and status protests before Small Business Administration (SBA) area offices, and appeals before the SBA Office of Hearings and Appeals. Jim regularly counsels clients on contract interpretation, organizational conflicts of interest, and small business compliance.Jim graduated with high honors from the George Washington University Law School, where he focused his studies on federal procurement law, was a member of the Law Review, and interned with the General Services Administration’s suspension and debarment office. Jim also holds a degree in theology magna cum laude from the Pontifical Gregorian University in Rome and a bachelor’s degree in classical languages and literature summa cum laude from the University of Kentucky, where he graduated Phi Beta Kappa.

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Jim maintains an active practice in bid protests before the Government Accountability Office and contracting agencies and counsels clients in contract disputes and compliance obligations.

Jim Tucker is of counsel in Morrison Foerster’s Government Contracts and Public Procurement Practice Group and is based in the firm’s Washington, D.C. office. Jim’s practice runs the gamut of litigation and counseling in federal procurement matters, with an emphasis on bid protests, Cost Accounting Standards disputes, and small business matters.

James Tucker

<div style="margin-bottom: 15px;" class="videoWrapper"><iframe class="sticky-video" title="Meet Alex Ward, Government Contracts Practice Co-Chair" src="https://www.youtube-nocookie.com/embed/TkliwdSlTaQ?rel=0" frameborder="0" allow="autoplay; encrypted-media" allowfullscreen="1" title="iframe"></iframe></div>J. Alex Ward is co-chair of Morrison Foerster’s Government Contracts and Public Procurement group. His practice covers a full range of government contracts matters, including investigations, bid protests, claims, general litigation, corporate transactions, and counseling. Alex strives in all matters is to provide his clients the highest level of efficient and effective representation.Alex represents contractors in internal and external investigations, disclosures to the government, and qui tam litigation, with great success in reducing or eliminating his clients’ exposure through active engagement with the government. His work in this area includes obtaining numerous declinations and dismissals of False Claims Act cases in their earliest stages, sparing his clients the cost, risk, and exposure of litigation.He has also served as lead counsel in dozens of bid protests involving military and civilian agency procurements of a wide range of products and services, including all manner of pre- and post-award protests in the GAO, the U.S. Court of Federal Claims, and state tribunals, as well as appeals to the U.S. Court of Appeals for the Federal Circuit and size protest appeals before the SBA’s Office of Hearings and Appeals.Alex handles all aspects of the claims process, from the initial assessment and drafting of requests for equitable adjustment through litigation in the Boards of Contract Appeals and the Court of Federal Claims. Alex’s practice also covers the full gamut of other controversies confronting government contractors, including prime-sub, teaming partner, employer-employee, competitor, and indemnification disputes. His litigation work also includes a wide variety of pro bono engagements, in which he has represented both individual and institutional clients in matters ranging from immigration and criminal defense to sustainable procurement and protection of the environment.Prior to joining the firm, Alex served in the U.S. Army as a commissioned officer and an Assistant to the General Counsel of the Army responsible for civil works and international matters, and as a clerk for judges on the U.S. Courts of Appeals for the Armed Forces and the D.C. Circuit. He is a member of the Boards of the Morrison & Foerster Foundation and the Chesapeake Bay Foundation and of Law360’s Government Contracts Editorial Board.

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Alex is co-chair of Morrison Foerster’s Government Contracts and Public Procurement practice. His practice covers a full range of government contracts matters, including bid protests, claims, investigations, corporate transactions, and counseling.

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Morrison Foerster’s Government Contracts Insights blog provides an in-depth analysis of news, developments, and trends impacting government contracting and procurement. Through Insights, attorneys from our nationally recognized Government Contracts and Public Procurement practice will offer a real-time assessment of the statutory, regulatory, legal, and business-related developments that are shaping the industry. This blog will also examine a full array of U.S. and non-U.S. public procurement issues, mindful that our clients compete in a global marketplace.Read about our <a href="http://govcon.mofo.com/editors/">Authors</a>.Never miss a post. Subscribe to get real-time updates.

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Deregulating Federal Procurement: Implications of Three Recent Executive Actions

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Since the inception of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) nearly eight weeks ago, the Small Business Administration (SBA) has issued loans under the Paycheck Protection Program (PPP) that have helped thousands of businesses remain afloat during the COVID-19 pandemic.  One of the most beneficial aspects of these loans for borrowers is that the entire loan amount may be forgiven if the proceeds are spent on payroll costs and other qualifying expenses during the eight-week period after loan disbursement (the “Covered Period”).  Last week, SBA released its PPP Loan Forgiveness Application, which provides borrowers with insight into what documentation and information will be necessary to apply and qualify for full loan forgiveness.Over the weekend, SBA issued additional guidance on this process by issuing two new interim final rules on <a href="https://home.treasury.gov/system/files/136/PPP-IFR-Loan-Forgiveness.pdf">loan forgiveness</a> and the <a href="https://home.treasury.gov/system/files/136/PPP-IFR-SBA-Loan-Review-Procedures-and-Related-Borrower-and-Lender-Responsibilities.pdf">loan review process</a>, respectively.  Below, we have highlighted a few of the most noteworthy aspects of these new rules.New Rule on Loan Forgiveness As we described <a href="https://govcon.mofo.com/small-business/ppp-loan-forgiveness-application-is-finally-here/">previously</a>, the PPP Loan Forgiveness Application provides detailed guidance for borrowers on how to calculate eligible payroll and non-payroll costs.  The new forgiveness rule incorporates this guidance, but also contains some additional clarifications:<ul><li>Alternate Time Frames for Eight Weeks of Payroll. Borrowers can select either: (1) the date the lender disburses the PPP loan to  the borrower,  (“Covered Period”), or (2) the first day of the first payroll cycle after the date of disbursement (“Alternative Payroll Covered Period”) as the first day for purposes of calculating the eight week time period for forgiveness eligibility.  Payroll costs paid and/or incurred during the Covered Payroll Period or Alternative Payroll Covered Period are eligible for forgiveness.  The new rule confirms that payroll costs are considered paid on the date of paycheck distribution or ACH credit transaction, and also clarifies that payroll costs are generally incurred on the day the employee’s pay is earned (i.e., on the day that the employee worked).  For incurred expenses to be eligible for forgiveness, the borrower must pay those costs on or before the next regular payroll date – even if that payroll date is after the eight-week period.  This flexibility means that borrowers need not run a special payroll during the eight weeks following disbursement to ensure eligibility for forgiveness.</li><li>No Alternative Time Frame for Non-Payroll Costs. Non-payroll costs are handled a little differently from payroll costs, however, as there is no Alternative Payroll Covered Period.  Non-payroll costs are mortgage interest payments (not including any prepayments or payments of principal), business rent or lease payments, and covered utility payments.  Such costs are eligible for forgiveness if they are:  (i) paid during the covered period, or (ii) incurred during the Covered Period and paid on or before the next regular billing date, even if the billing date is after the Covered Period.</li><li>40 Hour FTEs. Unless an exception applies, if the borrower’s average number of full-time equivalents (FTEs) during the Covered Period (or the Alternative Payroll Covered Period) is lower than its average number of FTEs between February 15, 2019 and June 30, 2019 or between January 1, 2020 and February 29, 2020, then the forgiveness amount will be subject to a reduction (unless salary/wage reduction is also a factor, as detailed below).<a name="_ftnref1" href="#_ftn1">[1]</a>  In general, a reduction in average FTEs will reduce the loan forgiveness amount by the same percentage as the percentage reduction in average FTEs.</li></ul>The new rule defines an FTE as “an employee who works 40 hours or more, on average, each week.”  To calculate the total average number of FTEs during the Covered Period (or Alternative Payroll Covered Period), the borrower must assign a value from 0-1.0 to each person employed during the Covered Period (or Alternative Payroll Covered Period), then aggregate those values.  In determining which value to assign to each employee, borrowers must divide the average number of hours the employee is paid per week during the Covered Period (or Alternative Payroll Covered Period) by 40. If the result is one or higher, the value 1.0 is to be assigned, while “the hours of employees who work less than 40 hours per week are calculated as proportions of a single full-time equivalent employee.”For part-time employees, borrowers can use one of two calculations:  (1) the average number of hours a part-time employee was paid per week during the covered period to arrive at a proportionate FTE count (e.g., a part-time employee who was paid for 30 hours per week on average would equal 0.75 of an FTE, while an employee paid for 10 hours a week on average would equal 0.25 of an FTE); or (2) considering all part-time employees (i.e., those at any amount less than 40 hours on average per week during the Covered Period or Alternative Payroll Covered Period) as 0.5 FTE employees for convenience.  Whichever method a borrower selects, it must apply the method consistently.After assigning a value to each employee, and aggregating those values to arrive at the total average FTEs for the Covered Period, the borrower must go through the same process of calculating the total average FTEs for the reference period that the borrower chooses.  Importantly, however, SBA will not use the reduction in total average FTEs against a borrower in the forgiveness reduction calculation if, by June 30, 2020, the borrower eliminates any reductions in FTEs that occurred between February 15, 2020 and April 26, 2020 (the “FTE Reduction Safe Harbor”).  In other words, if the number of FTEs in the borrower’s pay period inclusive of February 15, 2020 (calculated using the above methodology) is the same as or lower than the borrower’s total FTEs as of June 30, 2020, then the FTE Reduction Safe Harbor will apply.<ul><li>25 Percent Wage Reductions. SBA may also reduce loan forgiveness if there is a reduction in an employee’s salary or wages in excess of 25 percent during the Covered Period or Alternative Payroll Covered Period as compared to the wages paid during the selected reference period.  The forgiveness amount will be reduced by the weekly reduction in salary or wages that exceed 25 percent.  The new rule illustrates this by explaining that if a full-time employee’s weekly salary was $1,000 per week during the reference period, but only $700 per week during the Covered Period (or Alternative Payroll Covered Period), and that employee continued to work 40 hours or more a week, then the forgiveness amount would be reduced by $400.  This is because the first $250 reduction per week (i.e., 25 percent of $1,000) is exempt from reduction, but the remaining $50 of reduction per week must then be multiplied by 8 (i.e., the number of weeks in the Covered Period).</li></ul>The new rule makes clear, however, that borrowers will not be penalized twice if they have both an FTE employee reduction and salary/wage reductions.  In this situation, SBA will only apply the salary/wage reduction to the portion of the decline in employee salary and wages that is not attributable to the FTE reduction.  Further, these reductions do not apply to compensation above $100,000.  Additionally, if the borrower eliminates any reduction in an employee’s salary or wages by restoring the average annual salary or wage to the pre-February 15 level  by June 30, then the salary or wage reduction will not be used to reduce the forgiveness amount.New Rule on SBA Loan Review Procedures and Related Borrower and Lender ResponsibilitiesThis new rule provides further guidance to both lenders and borrowers regarding lender and SBA reviews of loan and forgiveness applications.  The following are some of the notable points:<ul><li>60 Days for the Bank, 90 Days for SBA. Borrowers must complete and submit the Loan Forgiveness Application (SBA Form 3508 or the lender equivalent) to their lenders.  Lenders are responsible for conducting a good faith review of the forgiveness application and confirming that the borrower made all required certifications, submitted all required documentation, and correctly calculated the forgiveness amounts on the application.  The lender will then: (a) approve the forgiveness application in whole or in part, (b) deny the application, or (c) (if directed by SBA) issue a denial without prejudice due to a pending SBA review of the loan.  The lender must inform SBA of its decision within 60 days from the date the lender received the borrower’s complete application.  SBA will perform its review and, after that review, send the forgiveness amount plus any accrued interest to the lender within no more than 90 days.  To the extent the lender’s determination is negative, borrowers will have the ability to request that SBA review the lender’s denial within 30 days of receiving notice from the lender.</li><li>SBA’s Audits. SBA has the right to review any loan application or loan forgiveness application at any time, regardless of the value of the loan.  In its review, SBA may review borrower documents to determine (a) if the borrower was eligible for the loan, (b) whether the borrower calculated the loan amount correctly, or (c) whether the borrower is entitled to loan forgiveness amounts claimed in the forgiveness application.  This is important for borrower who, together with its affiliates, received PPP loans in an amount less than $2 million who may not have realized its loan application could still be subject to SBA review for calculations and eligibility.  Specifically, SBA previously indicated<a name="_ftnref2" href="#_ftn2">[2]</a> that it would not audit those loans to determine whether the borrower correctly certified “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.”  However, this new rule makes clear that simply because SBA will not audit loan applications of loans under $2 million for the specific purpose of reviewing the borrower’s loan necessity certification does not mean such loans are free from SBA review entirely.  <ul><li>Although the new rule does not specify how SBA will choose when and which applications to review, it does state that SBA can review such applications at any time, therefore making it important for borrowers to retain all PPP-related documentation for the required six years after the date the loan is forgiven or repaid in full.</li></ul></li><li>Borrower Ineligibility and Forgiveness. If SBA determines that a borrower was ineligible for a PPP loan (for example, because the borrower did not qualify as an eligible small business), then the borrower is not eligible for forgiveness.  Borrowers will apparently be given an opportunity to appeal this decision based on a to-be-determined appeal process.  Although the rule does not address other remedies, SBA could pursue other actions against businesses that are ineligible.</li><li>Lenders and Ineligible Borrowers. Importantly, and somewhat surprisingly, SBA states that if it determines a borrower was ineligible for a PPP loan, SBA will not pay the lender’s loan processing fee for that loan.  This seems contrary to SBA’s earlier guidance to lenders that they could rely on a borrowers’ representations of eligibility in their loan applications.  It is possible that some lenders would not have participated in the PPP program or would have more closely scrutinized loan applications had they been aware SBA would not reimburse processing fees in instances where it determines that a borrower was not eligible for the loan in the first instance.</li></ul><a name="_ftn1" href="#_ftnref1">[1]</a> The borrower has the option to choose one of these two time periods.  Seasonal employers will also be able to compare their Covered Period to either of these periods or to any consecutive twelve-week period between May 1, 2019 and September 15, 2019.<a name="_ftn2" href="#_ftnref2">[2]</a> SBA provided this guidance, together with the Treasury Department, when it added FAQ #46 to the <a href="https://home.treasury.gov/system/files/136/Paycheck-Protection-Program-Frequently-Asked-Questions.pdf">FAQ Document</a> on May 13, 2020.

Tina is a partner in Morrison & Foerster’s Government Contracts practice. She represents a wide variety of government contractors including information technology, defense, biotechnology, and pharmace

Tina Reynolds

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Damien is a partner in the firm’s Government Contracts & Public Procurement practice. He represents clients in all facets of government contracts transactions, as well as regulatory counseling, subcon

Damien Specht

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Ali Young is an associate in the Government Contracts practice in Morrison Foerster’s Washington, D.C. office.

Alissandra Young McCann

Ali Young is an associate in the Government Contracts practice in Morrison Foerster’s Washington, D.C. office.

Alissandra McCann

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Roke Iko is an associate in the Litigation Department in Morrison & Foerster’s Washington, D.C. office.
Roke assists clients in the full range of government contracts litigation and compliance matters

Roke Iko

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SBA Issues New Rules on PPP Loan Forgiveness and Loan Review Procedures

Another Ticking Clock: Additional District Court Preliminarily Enjoins EO 14042 | Increasing Need for OMB Update on GA Court Clarification Order

Since the inception of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) nearly eight weeks ago, the Small Business Administration (SBA) 

SBA Issues New Rules on PPP Loan Forgiveness and Loan Review Procedures

During these uncertain economic times, the Small Business Administration (SBA) loans under the Paycheck Protection Program (PPP) have been a critical lifeline for many small businesses trying to weather the COVID-19 pandemic.  The PPP, which we have written about <a href="https://www.mofo.com/resources/insights/200327-faq-coronavirus-economic-stabilization-act-cesa.html" target="_blank" rel="noopener noreferrer">previously</a>, is part of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”).  One of the most beneficial aspects of these loans for Borrowers is that the entire loan amount may be forgiven if the proceeds are spent on payroll and other qualifying expenses during the eight-week period after loan disbursement (i.e., the Covered Period).As small businesses are beginning to use their loan proceeds, many are now wondering how they can ensure the specific use of their loan later qualifies for full forgiveness.  We are still waiting on SBA and the Treasury Department to issue more detailed guidance in this regard.  In the meantime, however, the new <a href="https://home.treasury.gov/system/files/136/3245-0407-SBA-Form-3508-PPP-Forgiveness-Application.pdf" target="_blank" rel="noopener noreferrer">Loan Forgiveness Application</a> provides Borrowers with an idea of what the forgiveness application process will look like, as well as the level and type of documentation that Borrowers should be sure to have readily available.While we encourage Borrowers to closely review the application for themselves, below are a few points we found worth highlighting:<ul><li style="padding-bottom: 18px;">The application confirms that the eight-week Covered Period of the PPP loan begins on the first day the PPP loan was disbursed. To illustrate this point, the application explains that “if the Borrower received its PPP loan proceeds on Monday, April 20, the first day of the Covered Period is April 20 and the last day of the Covered Period is Sunday, June 14.”  However, the application also clarifies that Borrowers with biweekly or more frequent payroll schedules may choose to calculate eligible pay roll costs using the eight‑week period beginning on the first day of the first pay period following the PPP Loan Disbursement Date.  This is referred to as the “Alternative Payroll Covered Period.”</li><li style="padding-bottom: 18px;">The application attaches a “PPP Schedule A Worksheet”, which provides Borrowers with a step-by-step method for calculating eligible payroll costs. Of note, the instructions for this worksheet explain that for each employee, the total amount of cash compensation eligible for forgiveness may not exceed $15,385 (which is the prorated amount of an annual salary of $100,000 during the Covered Period).</li><li style="padding-bottom: 18px;">Regarding eligible payroll costs, the application clarifies that payroll costs paid and payroll costs incurred during the Covered Period or Alternative Payroll Covered Period are eligible for forgiveness. The day that paychecks are distributed or the Borrower originates an ACH credit transaction is the day payroll is considered paid, while the day the employee’s pay is earned is the day payroll is considered incurred.  Payroll costs that are incurred but not paid during the Borrower’s last pay period of the Covered Period or Alternative Payroll Covered Period are still eligible for forgiveness if the Borrower pays those incurred costs on or before the next regular payroll date.</li><li style="padding-bottom: 18px;">One way a Borrower’s forgiveness amount can be reduced is if the Borrower’s average number of full-time equivalent (FTE) employees during the Covered Period (or the Alternative Payroll Covered Period) is lower than its average number of FTE employees between February 15, 2019, and June 30, 2019, OR between January 1, 2020, and February 29, 2020.<a href="#_ftn1" name="_ftnref1">[1]</a> The CARES Act provides that the calculation looks at the average number of FTE employees per month as calculated by the average number of FTE employees for each pay period falling within a month.  However, the application provides that the actual loan forgiveness amount that the Borrower will receive may be reduced if the Borrower’s average weekly FTE employees during the Covered Period (or the Alternative Payroll Covered Period) was less than during the Borrower’s total average weekly FTE employees during the chosen reference period.  Therefore, there may be a discrepancy between the statute and application.<a href="#_ftn2" name="_ftnref2">[2]</a><ul><li style="padding-bottom: 18px;">That said, the application does provide some much-welcomed clarity in what constitutes a FTE employee. While not a definition, per se, the application does provide methodologies for calculating the average number of FTE employees by giving each of the Borrower’s employees a numerical value based upon the average number of hours paid per week.  Borrowers can choose a simplified method for calculating FTEs, which assigns a value of 1.0 for each employee who works 40 hours or more per week and 0.5 for each employee who works fewer than 40 hours per week.</li></ul> </li><li style="padding-bottom: 18px;">The application also explains that the Borrower need not enter mortgage interest, rent, or utility payments made that the Borrower does not want to include in the forgiveness amount. Additionally, for eligible non-payroll costs to be forgiven, they must have been paid during the Covered Period or incurred during the Covered Period and paid on or before the next regular billing date (even if that billing date is after the Covered Period).  As a reminder, these eligible non-payroll costs cannot exceed 25% of the total forgiveness amount.</li><li style="padding-bottom: 18px;">Borrowers are required to submit certain documentation with the forgiveness application, such as: <ul><li style="padding-bottom: 18px;">Bank account statements (or third-party payroll service provider reports) documenting the amount of cash compensation paid to employees;</li><li style="padding-bottom: 18px;">Payroll tax forms (or equivalent third-party payroll service provider reports) and state employee wage reporting for the Covered Period (or Alternative Payroll Covered Period);</li><li style="padding-bottom: 18px;">Payment receipts, cancelled checks, or account statements documenting employer contributions to employee health insurance and retirement plans that are included in the forgiveness amount;</li><li style="padding-bottom: 18px;">Documentation showing average number of FTE employees on payroll per month between February 15, 2019, and June 30, 2019, OR between January 1, 2020, and February 29, 2020.<a href="#_ftn3" name="_ftnref3">[3]</a> Whichever time period the Borrower selects must be the same time period selected for the forgiveness reduction calculation; and</li><li style="padding-bottom: 18px;">For nonpayroll expenses, documentation verifying the existence of the obligations/services prior to February 15, 2020, as well as documentation related to eligible payments made during the Covered Period.</li></ul> </li><li style="padding-bottom: 18px;">Borrowers are also required to maintain certain additional supporting documentation related to eligibility, compliance, and forgiveness for six years after the date the loan is forgiven and repaid in full.</li></ul>We are monitoring the situation closely and will be sure to post about any further guidance issued by the Government in the near future.<a href="#_ftnref1" name="_ftn1">[1]</a> The Borrower will have the option to choose which of these two time periods it wishes to be compared to the Covered Period.  Seasonal employers will also be able to compare their Covered Period to either of the preceding periods or a consecutive twelve-week period between May 1, 2019, and September 15, 2019.<a href="#_ftnref2" name="_ftn2">[2]</a> Regardless of this discrepancy, under both the CARES Act and the Loan Forgiveness Application, the Borrower is exempt from the reduction in loan forgiveness based on the number of FTE employees if both of the following conditions are met:  (1) the Borrower reduced its FTE employee levels in the period beginning February 15, 2020, and ending April 26, 2020; and (2) the Borrower then restored its FTE employee levels by no later than June 30, 2020, to its FTE employee levels in the Borrower’s pay period that included February 15, 2020.<a href="#_ftnref3" name="_ftn3">[3]</a> Seasonal employers may also provide documentation for any consecutive twelve-week period between May 1, 2019, and September 15, 2019.

PPP Loan Forgiveness Application is Finally Here

During these uncertain economic times, the Small Business Administration (SBA) loans under the Paycheck Protection Program (PPP) have been a critical lifeline f

PPP Loan Forgiveness Application is Finally Here

Updated May 18, 2020As many companies are likely aware by now, Small Business Administration (SBA) loans under the Paycheck Protection Program (PPP) provide aid to qualifying small businesses in the form of loans with terms favorable to borrowers, including, in particular, provisions that allow potentially the entire loan amount to be forgiven if the proceeds are spent on payroll and other qualifying expenses. The PPP, which we have written about <a href="https://www.mofo.com/resources/insights/200327-faq-coronavirus-economic-stabilization-act-cesa.html">previously</a>, is part of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”).  There are many paths to qualifying as a small business under the CARES Act, one of which is if the company (with its affiliates) has 500 or fewer employees.Early guidance issued by both the SBA and the Treasury Department (the “Treasury”) after enactment of the CARES Act indicated that under this PPP-specific 500-employee size standard, only those employees whose principal place of residence is in the United States are included in the size calculation.<a href="#_ftn1" name="_ftnref1">[1]</a>  Specifically, <a href="https://home.treasury.gov/system/files/136/PPP--IFRN%20FINAL.pdf" target="_blank" rel="noopener noreferrer">Interim Final Rule</a> originally published on April 2, 2020, states the following:2. What Do Borrowers Need to Know and Do? a. Am I eligible?You are eligible for a PPP loan if you have 500 or fewer employees whose principal place of residence is in the United States, or are a business that operates in a certain industry and meet the applicable SBA employee-based size standards for that industry.Additionally, FAQ #3 of the <a href="https://home.treasury.gov/system/files/136/Paycheck-Protection-Program-Frequently-Asked-Questions.pdf" target="_blank" rel="noopener noreferrer">FAQs</a><a href="#_ftn2" name="_ftnref2">[2]</a> published by the SBA and the Treasury on April 6, 2020, states the following:3. Question: Does my business have to qualify as a small business concern (as defined in section 3 of the Small Business Act, 15 U.S.C. 632) in order to participate in the PPP?Answer: No. In addition to small business concerns, a business is eligible for a PPP loan if the business has 500 or fewer employees whose principal place of residence is in the United States, or the business meets the SBA employee-based size standards for the industry in which it operates (if applicable). Similarly, PPP loans are also available for qualifying tax-exempt nonprofit organizations described in section 501(c)(3) of the Internal Revenue Code (IRC), tax-exempt veterans organization described in section 501(c)(19) of the IRC, and Tribal business concerns described in section 31(b)(2)(C) of the Small Business Act that have 500 or fewer employees whose principal place of residence is in the United States, or meet the SBA employee-based size standards for the industry in which they operateIn other words, the rule and previous FAQ guidance both suggest that only employees whose principal place of residence is in the United States will count toward the size of a concern under the PPP’s 500-employee size standard.  However, on May 5, 2020 (a month after the above guidance had been published), the Treasury and the SBA added the following FAQ #44:44. Question: How do SBA’s affiliation rules at 13 C.F.R. 121.301(f) apply with regard to counting the employees of foreign and U.S. affiliates?Answer:  For purposes of the PPP’s 500 or fewer employee size standard, an applicant must count all of its employees and the employees of its U.S and foreign affiliates, absent a waiver of or an exception to the affiliation rules.  13 C.F.R. 121.301(f)(6).  Business concerns seeking to qualify as a “small business concern” under section 3 of the Small Business Act (15 U.S.C. 632) on the basis of the employee-based size standard must do the same.Although this Answer doesn’t explicitly state that concerns have to count the foreign employees of the applicant and those of its foreign affiliates, the statement that all employees must be counted without inclusion of the clarifying “whose principal place of residence is in the United States” language seems to suggest that foreign employees count toward PPP’s “500 or fewer” size standard.  Such a position would be completely inconsistent with the SBA’s and Treasury’s earlier guidance, which still appears in the current FAQs.Recognizing this inconsistency, earlier today SBA issued a <a href="https://home.treasury.gov/system/files/136/Interim-Final-Rule-on-Treatment-of-Entities-with-Foreign-Affiliates.pdf">new rule</a> on eligibility for companies with foreign affiliates.  SBA has now made clear that all employees of foreign affiliates (not just those employees in the U.S.) need to be counted in determining eligibility for a PPP loan.  Importantly, however, because SBA acknowledges that its guidance on this point has been inconsistent, SBA has provided yet another safe harbor.  If a company with foreign affiliates applied for its loan prior to May 5 and only included U.S.-based employees in the employee count, it will not be deemed to have made an inaccurate certification:However, as an exercise of enforcement discretion due to reasonable borrower confusion based on SBA guidance (which was later resolved through a clarifying FAQ on May 5, 2020), SBA will not find any borrower that applied for a PPP loan prior to May 5, 2020 to be ineligible based on the borrower’s exclusion of non-U.S employees from the borrower’s calculation of its employee headcount if the borrower (together with its affiliates) had no more than 500 employees whose principal place of residence is in the United States. Such borrowers shall not be deemed to have made an inaccurate certification of eligibility solely on that basis. Under no circumstances may PPP funds be used to support non-U.S. workers or operations.In other words, if the company’s application pre-dates May 5, this should not be a concern, but if later, and the company has foreign employees or foreign affiliate employees that bring it over the 500 employee threshold, the company is ineligible for a PPP loan.<a href="#_ftnref1" name="_ftn1">[1]</a> Note that for companies electing to use the employee-based size standard set by their primary NAICS code, all employees (not just those employees residing in the United States), must be included in the size calculation.<a href="#_ftnref2" name="_ftn2">[2]</a> All prior FAQs were consolidated into a single document on the Treasury CARES Act website on May 6, 2020.  Importantly, the FAQs do not carry the force and effect of law independent of the statute and regulations on which they are based.

Are Foreign Employees Included in Calculating Size for PPP’s 500-Employee Size Standard? New Guidance Makes the Answer Unclear

Updated May 18, 2020 As many companies are likely aware by now, Small Business Administration (SBA) loans under the Paycheck Protection Program (PPP) provide ai

Are Foreign Employees Included in Calculating Size for PPP’s 500-Employee Size Standard? New Guidance Makes the Answer Unclear

This post has been updated on May 6, 2020 with new safe harbor deadline for repayment of PPP loans.Given the proliferation of adverse news articles and TV pundit segments about well-funded companies that have received federal, Small Business Administration (SBA) loans under the Paycheck Protection Program (PPP), it is important to separate what guidance has now been issued and what appears to be more political rhetoric than law.  As discussed below, companies should take agency guidance seriously and consider (and document) the issues raised, but legitimate small business PPP recipients can to a large extent take with a grain of salt what amounts to political sabre rattling in a time where specific large companies are being pilloried in the press.The PPP, which we have written about <a rel="noopener noreferrer" target="_blank" href="https://www.mofo.com/resources/insights/200327-faq-coronavirus-economic-stabilization-act-cesa.html">previously</a>, is part of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”).  The program initially had $349 billion in appropriations, but when that was quickly exhausted, Congress injected another $310 billion into the program.  The program provides aid to qualifying small businesses in the form of loans with terms favorable to borrowers, including, in particular, provisions that allow potentially the entire loan amount to be forgiven if the proceeds are spent on payroll and other qualifying expenses.Shortly after the second round of funding, and in the face of new negative publicity surrounding the program, the SBA and the Treasury Department came out with <a rel="noopener noreferrer" target="_blank" href="https://home.treasury.gov/system/files/136/Paycheck-Protection-Program-Frequently-Asked-Questions.pdf">additional FAQs</a><a name="_ftnref1" href="#_ftn1">[1]</a> specifically focused on one element of the application process, the fact that the borrower must certify that“[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.”  In addressing a question (#31) as to whether companies with adequate sources of liquidity might qualify for PPP loans, the agencies provided the following clarification:Although the CARES Act suspends the ordinary requirement that borrowers must be unable to obtain credit elsewhere (as defined in section 3(h) of the Small Business Act), borrowers still must certify in good faith that their PPP loan request is necessary.  Specifically, before submitting a PPP application, all borrowers should review carefully the required certification that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.”  Borrowers must make this certification in good faith, taking into account their current business activity and their ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business.  For example, it is unlikely that a public company with substantial market value and access to capital markets will be able to make the required certification in good faith, and such a company should be prepared to demonstrate to SBA, upon request, the basis for its certification.The FAQ went on to clarify that if a company that previously applied for a loan now believes, based on this additional guidance, that it should return a loan, “[a]ny borrower that applied for a PPP loan prior to the issuance of this guidance and repays the loan in full by May 7, 2020, will be deemed by SBA to have made the required certification in good faith.”  In addition, the FAQ emphasized that lenders need not perform additional research in order to rely on the borrower’s certification that the loan was necessary.On April 29, SBA and Treasury issued yet <a rel="noopener noreferrer" target="_blank" href="https://home.treasury.gov/system/files/136/Paycheck-Protection-Program-Frequently-Asked-Questions.pdf">another clarification</a>, addressing the “necessary” language in the context of private equity-backed companies:37. Question: Do businesses owned by private companies with adequate sources of liquidity to support the business’s ongoing operations qualify for a PPP loan?Answer: See response to FAQ #31.Finally, in response to a question (#39) about whether or not the SBA will review PPP loan files, the agency responded as follows:Yes. In FAQ #31, SBA reminded all borrowers of an important certification required to obtain a PPP loan.  To further ensure PPP loans are limited to eligible borrowers in need, the SBA has decided, in consultation with the Department of the Treasury, that it will review all loans in excess of $2 million, in addition to other loans as appropriate, following the lender’s submission of the borrower’s loan forgiveness application.  Additional guidance implementing this procedure will be forthcoming.In light of these FAQs we have received a number of questions from companies trying to determine whether they should return PPP funds already received or retract applications that are in process.  The following key considerations should guide companies’ assessments of these questions:1. The “necessary to support . . . ongoing operations” standard is subjective.Because the standard was developed specifically for the PPP program and is not further defined in any FAQ, the “necessary” standard has no objective measure.  SBA’s 7(a) loan regulations do not address this language, because they do not follow this standard.  Indeed, for other SBA loan programs, potential borrowers must demonstrate an affirmative lack of access to capital, known as the “Credit Elsewhere” policy.  SBA has made clear that no such standard applies here (FAQ # 31:  “Although the CARES Act suspends the ordinary requirement that borrowers must be unable to obtain credit elsewhere (as defined in section 3(h) of the Small Business Act), borrowers still must certify in good faith that their PPP loan request is necessary.”)  As result, one thing we do know is that “necessary” does not include a proven inability to obtain credit elsewhere—at least as that concept is implemented in the 7(a) program.The best standard the agencies have articulated to date may be this one:  “Borrowers must make this certification in good faith, taking into account their current business activity and their ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business.”  As a result, in place of the clear “Credit Elsewhere” policy, the agencies appear to have created a subjective factor test where harm to “current business activity” (e.g., loss of sales and uncertainty) is balanced against “liquidity” that can be tapped without significant detriment to the business (e.g., lines of credit and cash on hand).  It is difficult not to see this as a lower and easier to meet standard than that which applies for 7(a) loans.  A lesser standard would comport with apparent Congressional intent to distribute the PPP funds quickly with a minimum of hassle.Given that this is a factor-based test relying on the borrower’s good faith, absent a showing of absolute bad faith, or indicia of profligate spending on the part of a loan recipient, it is difficult to imagine how SBA will be able to demonstrate with legal certainty that a company did not have a good‑faith belief that the PPP loan proceeds were “necessary.”  Companies can protect themselves in this regard by documenting adverse impacts that the current environment has had on its business, and by showing that but for the loan proceeds, the company might not be able to maintain its workforce or ongoing business operations into the foreseeable future.  The fact that a company has access to a line of credit or other capital does not in and of itself bar a company from seeking a PPP loan.  However, especially where a company has a comfortable cash cushion or wealthy investors, the basis for the PPP loan request should be carefully documented to show, for example, that funds are insufficient to maintain the business without PPP or that they are otherwise required for significant expenditures necessary for the business.2. It is almost certain that public companies or those receiving more the $2 million in loan proceeds will be audited or otherwise scrutinized in some manner.Even before FAQ #39 was issued, the Treasury Secretary stated in television appearances that companies receiving PPP loans in excess of $2 million would be audited, and that criminal prosecutions would be initiated if wrongdoing is discovered.  It remains to be seen whether such large‑scale audits can be performed as a practical matter or what level of depth of analysis would be performed.  But it is undeniable that the PPP program itself will be scrutinized for many years—by Congress, by agency officials and Inspector Generals, and most certainly in the press and the court of public opinion.  For these reasons, companies decided whether to return or reject PPP funding should document their good‑faith belief now and consider whether the hassle factor, potential legal fees, and adverse publicity outweigh any loan benefits.3. Criminal and civil prosecution, while unlikely in the absence of actual fraud, are risks to be considered.Criminal False Claims Act and False Statements Act cases are somewhat rare.  However, in theory, if SBA determines that a company did not certify eligibility in good faith, the company could be charged criminally under the federal False Claims Act<a name="_ftnref2" href="#_ftn2">[2]</a> or False Statements Act<a name="_ftnref3" href="#_ftn3">[3]</a>.  The civil False Claims Act, which is far more commonly used, allows for treble damages, which in the context of the PPP could be three times the value of the loan.  As noted above, we think it is unlikely such prosecutions ultimate would be successful where the issue will turn on a subjective determination of good faith as to whether the loans were necessary and the balancing of multiple subjective factors.  Prosecution is further unlikely if a company’s submissions were accurate and complete in all material ways.  However, companies that did not disclose or consider affiliates, or that otherwise had incorrect or misleading information on their applications, could be prosecuted.  Any litigation could also name the certifying individual as part of the charging documents.  One aspect of the False Claims Act to further consider is the qui tam provisions of the Act that permit a whistleblower or other person with non-public information to come forward with a complaint and share a portion of the proceeds of any settlement or verdict.  This provision incentivizes individuals within a company that might be uncomfortable with the loan certification to come forward.  The plaintiffs’ bar has already taken note of this possibility and issued public statements indicated they expect many qui tam matter emanating out of the CARES Act relief programs generally, and PPP in particular.In sum, companies for which PPP loan funding is an available and appropriate avenue for relief should feel confident in taking and retaining loan monies to which they are entitled.  They should document their analysis and be prepared to provide it when appropriate.  However, those companies with significant doubts as to whether the funds are needed (e.g., with significant cash reserves), or whether in fact they qualify for the loans in light of affiliation and other considerations, might reconsider their initial inclination to apply under the PPP.  The costs of defending a suit or being audited or just dealing with adverse publicity need to be considered by companies in balancing whether it makes the most sense to return or refuse loan proceeds.  Any company that decides to take this route should do so by May 7.<a name="_ftnref1" href="#_ftn4">[4]</a><a name="_ftn1" href="#_ftnref1">[1]</a> All prior FAQs were consolidated into a single document on the Treasury CARES Act website on April 29, 2020.  Importantly, the FAQs do not carry the force and effect of law independent of the statute and regulations on which they are based.<a name="_ftn2" href="#_ftnref2">[2]</a> Per 18 U.S.C. § 1031, fraud against the U.S., including obtaining money from the government under false or fraudulent circumstances, is punishable by fine, imprisonment of up to ten years, or both.<a name="_ftn3" href="#_ftnref3">[3]</a> Per 18 U.S.C. § 1001, false statements may be punished by fines, imprisonment for no more than five years, or both.<a name="_ftn1" href="#_ftnref4">[4]</a> On May 5, 2020, SBA and Treasury issued additional FAQ guidance extending the safe harbor to May 14, 2020. Companies need not apply for this extension.

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Is My Company’s PPP Loan “Necessary to Support Ongoing Operations?” What If I’m Wrong?

Updated Coronavirus (COVID-19) Guidelines For Employers

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This post has been updated on May 6, 2020 with new safe harbor deadline for repayment of PPP loans. Given the proliferation of adverse news articles and TV pund

Is My Company’s PPP Loan “Necessary to Support Ongoing Operations?” What If I’m Wrong?